The Treasury is to underpin a £75m loan for the Drax power station in North
Yorkshire, marking the first project to be financed using the Government’s
£40bn infrastructure guarantee scheme.

Drax used the guarantee to agree a cheaper debt deal with Friends Life, which is providing a £75m loan maturing in June 2018.

The loan will be used to part-finance a £700m project to convert three of the six plants at the 4000MW Drax plant to greener biomass fuels. The plant is Britain’s biggest power station, supplying 7pc of the UK’s electricity needs.

Other financing for the project will come from a £190m share placing last October, a £100m term loan with the Prudential, a £50m loan from the Green Investment Bank and Drax’s £400m revolving credit facility.

Danny Alexander, chief secretary to the Treasury, hailed the Friends Life deal as “the first project of many to be enabled by this radical, innovative approach”, adding the Government’s “door is open” for investors looking to finance infrastructure projects.

The guarantee is already earmarked for the £1bn extension of the Northern Line extension to Battersea but it could also form a component of the financing for the £4bn Thames Tideway super sewer, the £600m Mersey Gateway toll bridge and new nuclear power stations.

The Drax deal raised eyebrows in the City, however, because it effectively replaced a further £50m of loans from the state-backed Green Investment Bank.

Nick Prior, head of infrastructure at Deloitte, said: “The deal gives encouragement to developers of infrastructure projects. But there’s only a net £25m of new investment and it shows the Treasury guaranteee is more attractive than the Green Bank. It’s almost like you have different arms of Government competing to provide finance.”

Drax is understood to be borrowing at 4pc via the Friends Life deal versus 6pc from the Green Bank.

Geoffrey Spence, chief executive of the Treasury unit Infrastructure UK, said, however: “The guarantee scheme is not competing with the Green Bank. They are complementary.”

He said Drax had agreed at the time of its equity raising that it would cut its borrowing from the Green Bank from £100m to £50m.